HUP to the Government: Abandon the Law on Additional Profit Tax, It Is Harmful and Dangerous

The Croatian Employers’ Association (HUP) once again calls on the Government to abandon the introduction of an additional tax on extra profits, as it considers it harmful and dangerous for the economy, and it will weaken the most successful Croatian companies, stated HUP’s Director General Irena Weber on Wednesday.

– We urge the Government to continue with tax relief for the economy, rather than introducing a new additional profit tax, as it will certainly hinder the continuation of investments and further wage growth – said Weber at a meeting with journalists.

Today is the last day for public consultation on the Government’s proposal for the law on additional profit tax, under which this tax would be paid by companies with revenues in 2022 exceeding 300 million kuna, at a rate of 33 percent, but only on profits exceeding 20 percent compared to the four-year average.

Millions in taxes and layoffs

Weber reported that HUP did not submit comments on the proposed law during the public consultation, but some HUP members did, noting that HUP tries to express its proposals and comments through the Economic and Social Council (GSV) and various committees.

– We have prepared an analysis of the impact of the proposed law based on data from member companies and determined that the adoption of this law would be extremely harmful, especially now that we have already entered a technical recession with a crisis at our doorstep. Additionally, the law has a retroactive effect, equating entrepreneurs who have not invested with those who have improved management, despite rising costs and the impact of the pandemic crisis and other challenges – said Weber.

She also stated that HUP is preparing a list of exceptions from this tax, which will also be submitted to the Government, such as exporters who generate revenue from exports to foreign markets, and this tax would significantly reduce their competitiveness in the European market where they are already ‘struggling’ more because entrepreneurs from other countries have lower tax burdens and higher profit margins.

She provided examples of companies whose business processes last much longer than a year; if they invest in a new facility, line, or similar, it happens that in 2022 a much larger amount of revenue is generated, thus these companies become liable for the new tax on extra profits, even though they did not have such revenues in previous periods.

– People are desperate and disappointed, an example is the shipyard Viktor Lenac, which, along with the new tax, has new contracted jobs in question, because if it is introduced, they will have to pay around 40 million kuna in taxes and lay off 150 people. Or a company from Rijeka that plans a new large production investment in Lika and to employ about 180 people, and now is not sure if they will be able to do that. There are others who have invested, and now they will be punished for it – emphasized Weber.

Therefore, HUP proposes that reinvested profits be tax-exempt as this would be fair, and they still believe that the Government will listen to both entrepreneurs and economists, who are united in the view that the introduction of a tax on extra profits is unjust and sends a bad message to investors, making Croatia unsafe for investments.

– The negative effects will be much greater than those for the budget. If the Government does not abandon this, which we hope it will, it is possible that companies will file lawsuits against the state, and we are already consulting on legal aspects within HUP – emphasized Weber.

Not following the EU directive

Based on the analysis, HUP has identified four sectors that would be most negatively affected by the introduction of such a tax – tourism, ICT, finance-banking, and industry, particularly manufacturing and pharmaceuticals.

Weber reminded that according to the Government, and as HUP has analyzed, there are about 208 large companies in Croatia to which this new tax would apply and which had revenues above 300 million kuna in 2021.

How many there will be in 2022 is still unknown, but for HUP it is completely unacceptable for revenues to be the criterion for an additional profit tax, which would have to be paid by an entrepreneur with 300 million kuna or more in revenue and profit growth above 20 percent, and not, for example, one with 295 million kuna in revenue and possibly significantly higher profit growth. This would also include companies that were medium-sized in 2018 but have developed into large ones.

Additionally, the Croatian Exporters Association (HIZ), which also proposes abandoning the law, compared the proposed law and the EU Council regulation on urgent intervention to address high energy prices. They claim that the additional profit tax proposed in Croatia is not identical to the intention of the EU regulation, which aims to introduce a solidarity contribution for entrepreneurs engaged in activities in the sectors of crude oil, natural gas, coal, and refineries, and who generate at least 75 percent of their revenue from those activities. The Croatian law, they argue, would affect all sectors, activities, and operations of large entrepreneurs, which was certainly not the intention of the European regulation.

They add that the ‘only intersection of both texts’ is the rate of 33 percent as the lowest possible rate and the word ‘profit’. They say that both texts serve to ensure additional revenues for the state budget with the justification that this will secure funds for implementing measures to assist households, institutions, and the economy affected by high energy prices.

However, as they state, this earmarked use of tax revenues is not explicitly mentioned in the proposal for the additional profit tax law, and since taxes are non-earmarked contributions, appropriate regulations should ensure earmarked use or call them contributions.

They argue that large entrepreneurs in Croatia are already taxed at a higher rate with the existing profit tax, which, alongside the introduction of an additional tax and regardless of its temporary nature, means a significantly higher tax burden and tax punishment for large companies. Therefore, they consider it unjustified to urgently introduce an additional profit tax for all sectors in Croatia, which could not benefit from the situation of rising energy prices, nor have they generated excess revenue as stated in the European regulation.

Weber added that they know that only a few countries in the EU have developed that directive, but few have introduced it, and no one as broadly as Croatia, except Hungary, which announced something similar but has yet to take concrete steps.

– We wonder what the purpose of this is, especially now that we have about six billion kuna in additional revenue in the budget from VAT. We really do not see a reason to ‘hit’ the liquidity of large companies that invest, employ, and raise wages in an attempt to retain workers, of whom we are increasingly lacking – concluded Weber.